Unleashing a greater force for clarity in public finance

Now at the end of 2011, as Tea-Party forces in the House of Representative finally bow to conventional economic wisdom, it may be time for economics professors to toss out some new radical ideas about public finance. OK, let me try.

We have heard a lot of radical arguments for reducing taxation and reducing government debt, as the alleged keys to strong economic growth. Actually, however, taxes tend to be a greater percentage of GDP in richer nations. A reasonable hypothesis is that governments in poor nations may tax less and spend less because they have less fiscal capacity to control waste and corruption in the management of public funds. Such nations that cannot manage public funds effectively then suffer from a lack of public infrastructure, which in turn may be a basic cause of their poverty. That is, the greater wealth of rich nations may depend on their governments’ fiscal capacity to provide essential public goods with less waste than poor nations. A good reliable system for managing public finances is one of the essential pillars of prosperity, as described in a new book by Timothy Besley and Torsten Persson.

The ultimate basis for all controls on public spending is of course political. The strength of public financial management in America is ultimately based on democratic accountability of our political leaders for what they do with our taxes. Democracy may not be perfect, but it is better than any other system for deterring corrupt misuse of public funds.

From this perspective, we can argue instead that the key to reviving long-term economic growth may be found in reforms to further improve political controls on public finance in our nation.

When voters are swayed by promises of lower taxes and lower deficits without loss of public services, it is clear that our system of democratic fiscal oversight has some room for improvement. As the prosperity of our nation depends on the good judgment of a majority of voters, so voters depend on each others’ ability to understand questions of public finance. That is, voters’ comprehension of public budgets is itself a public good. We need a system to make sure that voters can understand our public budgets, and it is worth investing public money to develop such understanding.

So my radical proposal has two parts. First, our federal, state, and local governments should publish their annual budgets online in a form that any high-school graduate can understand. Second, our public high schools should be required to teach students how to read government budgets.

I know that this may sound impractically idealistic. But I can recommend at least one good textbook: Dall Forsythe’s Memos to the Governor. Written by a former budget director of New York state, this short book offers a good introduction to the standard tricks that have been used to make public spending more obscure.

Public officials, however well-intentioned, are under constant pressure to provide more public services for less money and so may feel regularly tempted to simulate such superior productivity by incurring new public debts that are not fully reported in the current year. Devices for concealing billions of dollars of new debt cannot be fully secret, however, and the readers of Forsythe’s book will be well prepared to watch for them. A better informed citizenry could prompt greater creativity in inventing new devices for concealment, of course. But a greater force for clarity and transparency may be unleashed when millions of families have high-schools students who are asking why the public-finance materials have to be so confusing.

So this is my radical proposal: Before demanding lower taxes or lower deficits, we voters should demand to be better informed about our public financial system. Then our ability to demand better use of public funds can become a stronger pillar for future growth and prosperity.

2 comments

another reasonable hypothesis is that public rent-seeking becomes more profitable in large economies, giving more incentive for government officials to grow.

Causation (size of economy vs gov’t) almost surely goes both ways, so I would be sure to amend your proposal with: “Before demanding higher taxes or higher deficits, we voters should demand to be better informed about our public financial system. “

I think the first step is to prepare public accounts according to generally accepted accounting standards. The lack of a balance sheet and the lack of a depreciation figure for every year makes public accounts very difficult to follow even for a seasoned accountant. Of course, regular people need to be informed and helped to understand these figures too.